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Ex-Fed New York President Dudley says the Fed is fighting the last war on inflation

  
  Analysis
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Says excess dovishness at the Federal Open Market Committee increases the risk of a major policy error at the Fed.

Bill Dudley is a past resident of the Federal Reserve Bank of New York (2009 to 2018) and is now at Princeton University’s Center for Economic Policy Studies.
Says Fed officials:
  • anticipate that inflation will fall back close to 2% in 2022 … even as supply chain disruptions, energy costs and rising rents threaten to make the current price surge bigger and longer lasting than expected. 
  • And they expect inflation to keep decelerating in 2023 and 2024
  • if inflation proves more persistent than anticipated and even accelerates as the economy pushes beyond full employment, they’ll have to tighten much more aggressively than they expect. 
  • The result could more resemble what happened from 2004 to 2006 – when the Fed raised its short-term interest-rate target by 4.25 percentage points, to 5.25% from 1%, with quarter-percentage-point increases in 17 consecutive policy-making meetings – than what they currently have pencilled in. 
Here is the link to the Bloomberg piece (may be gated)  for much more.
Dudley, Yellen and Fischer, all since departed from the Fed:
Says excess dovishness at the Federal Open Market Committee increases the risk of a major policy error at the Fed. 

Another Chinese property development firm missed a debt payment

  
  Analysis
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Bloomberg with the report on a missed payment by Fantasia Holdings.

The news was out overnight so it is not new news, posting as an ICYMI.
Says the Bloomberg report (more at that link above (may be gated) )
  • Fantasia didn’t repay a $205.7 million bond that was due Monday, according to a company statement. 
  • Separately, property management company Country Garden Services Holdings Co. said that a unit of Fantasia didn’t repay a 700 million yuan ($108 million) loan that also came due on Monday and that a default was probable. 
  • Shenzhen-headquartered Fantasia’s management and board “will assess the potential impact on the financial condition and cash position of the Group” stemming from the skipped bond payment, it said. 
Bloomberg with the report on a missed payment by Fantasia Holdings. 

CNN report that Biden tells House progressives spending package needs to be between $1.9 tln and $2.2 tln

  
  Analysis
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Via a CNN report, citing two sources

Biden in a virtual meeting with a group of House progressives on Monday
  • said the top line of the social safety net package needs to come down to somewhere between $1.9 trillion and $2.2 trillion
  • Biden told the group, according to one of the sources, that was the range he felt Sens. Joe Manchin and Kyrsten Sinema would accept but did not specify further within that range.
Climbing down from higher numbers earlier. Less fiscal boost will not be as positive for markets looking for stimulus, but on the other hand getting the thing passed will be positive.

World Bank leaders found to be favouring China … “Doing Business”

  
  Analysis
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An internal committee of the World Bank managed to launch an independent investigation into top brass …

The World Bank ethics committee commissioned a law firm to sniff out what was going on.
Their report found that World Bank leaders, including then-Chief Executive Kristalina Georgieva, applied “undue pressure” on staff to boost China’s ranking in the bank’s “Doing Business 2018” report:
  • Georgieva, and a key adviser, Simeon Djankov, had pressured staff to “make specific changes to China’s data points” and boost its ranking at a time when the bank was seeking China’s support for a big capital increase.
  • The report raises concerns about China’s influence at the World Bank, and the judgment of Georgieva – now managing director of the International Monetary Fund – and then-World Bank President Jim Yong Kim.
  • Georgieva said she disagreed “fundamentally with the findings and interpretations” of the report and had briefed the IMF’s executive board.

Kristalina Georgieva now heads the IMF.  Oh dear.

An internal committee of the World Bank managed to launch an independent investigation into top brass ... 

Some members of US Congress want Fed Chair Powell sacked

  
  Analysis
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This from three members of the US Congress, who seem confused about the remit of a central bank:

Via a Politico report:
  • Reps. Alexandria Ocasio-Cortez, Rashida Tlaib and Ayanna Pressley  … called for Federal Reserve Chair Jerome Powell to be replaced
  • “As news of the possible reappointment of Federal Reserve Chair Jerome Powell circulates, we urge President Biden to re-imagine a Federal Reserve focused on eliminating climate risk and advancing racial and economic justice”
Sounds great! I wonder should the Chair print more or less to hit these three added objectives though?
If Yellen was still Chair she’d know how to deal with these clowns.
This from three members of the US Congress, who seem confused about the remit of a central bank:

North Korea appears to have resumed operation of its plutonium-producing reactor

  
Analysis, Politics
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Producing plutonium will allow the country to expand its arsenal of nuclear weapons.

Wall Street Journal report on findings of the UN Atomic Agency:
  • “Since early July, there have been indications, including the discharge of cooling water, consistent with the operation of the reactor,” said the report by the International Atomic Energy Agency.
  • and there are indications that North Korea is also using a nearby laboratory to separate plutonium from spent fuel previously removed from the reactor.
The agency described the twin developments as “deeply troubling” and a clear violation of United Nations Security Council resolutions.
North Korea’s plutonium-producing reactor is at Yongbyon
  • appeared to have been inactive from December 2018 until the beginning of July 2021
Producing plutonium will allow the country to expand its arsenal of nuclear weapons. 

Russia raises its inflation, GDP, capex forecasts

  
Analysis, Economy
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Russian economy ministry issues revised forecasts

 

  • 2021 GDP growth forecast up to 3.8% from 2.9%
  • lifts Urals oil price forecast to $65.9/bbl from $60.3/bbl
  • 2021 inflation forecast to 5% from 4.3%
  • 2021 capital investment growth forecast to 4.5% from 3.3%
  • 2021 average dollar/rouble rate to 72.8 from 73.3 seen in April

 

The ministry comments on the higher forecasts:

  • We see the economy is recovering faster than we had expected
  • Our experts say the economic recovery potential is not exhausted yet
On the currency:
  • We all realise that the rouble price should be different at oil prices of $75 per barrel
  • current rouble weakness blamed on sanction risks, OPEC+ uncertainty around global oil output.
Russia’s inflation target is 4%, the latest reading has it at 6.5%. Russia’s central bank is expected to raise its key rate again from 5.5% on July 23.
USD/RUB daily chart:
USD/RUB daily chart

Goldman Sachs is worried about the prospects for ‘mega cap tech’ stocks – 3 big risks

  
  Analysis
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Via a Goldman Sachs analyst research note ICYMI (on Friday) covering huge technology shares like Facebook, Apple, Amazon, Microsoft and Alphabet (Google).

GS nominate risk #1 as higher taxes, commenting on plans from the Biden administration for higher corporate and capital gains tax rates:
  • proposed corporate tax rate hiked to 28% (note that Biden has indicated a 25% compromise rate)
  • “FAAMG stocks have appreciated by $5 trillion during the last 5 years, accounting for 29% of the S&P 500 market cap increase during that time” … and thus a drop in these stocks will have an outsized impact on index values
#2 is the ‘higher interest rates’ usual suspect:
  • low rates have been a key support for valuations for over ten years now
  • the time of near zero rates could be approaching an end though
  • “All five FAAMG stocks …  are especially sensitive to moves in long-term interest rates“
#3 is increased regulation … GS go as far as to say “Looking forward, the greatest fundamental risk to the continued market leadership of the five largest companies appears to be the potential intervention of regulators
  • … legal battles and investigations over their market power and competitive practices ranging from commercial litigation to DoJ and FTC antitrust lawsuits to Congressional probes”
GS do note on #3 though that Google has soared since the launch of the DOJ investigation (in October 2020 … price from circa $105 to circa $135).
Via a Goldman Sachs analyst research note ICYMI (on Friday) covering huge technology shares like Facebook, Apple, Amazon, Microsoft and Alphabet (Google).

Responses to the Federal Reserve FOMC continue

  
  Analysis
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Responses continue to flow in, this via Westpac, brief summary comments:
  • The FOMC left its policy settings unchanged, and repeated its key guidance messages, as was widely expected. 
  • The statement was a little more upbeat, noting “progress on vaccinations and strong policy support” are helping strengthen economic indicators, including employment. The rise in inflation was acknowledged, but seen as transitory. 
  • The Fed reiterated :”the path of the economy will depend significantly on the course of the virus, including progress on vaccinations.” QE purchases will remain at at least $120bn per month “until substantial further progress has been made toward” the maximum employment and price stability goals. In Q&A, he said it’s not yet time to start talking about tapering asset purchases.
Response via National Australia Bank:
  • The latest FOMC meeting and press conference from chair Powell has come and gone with no big fireworks, though Treasury yields are lower, as is the USD, after Powell made clear that it was ‘not time yet’ to have a conversation about tapering its $120bn monthly QE bond buying programme and that we ‘are not close to’ the substantial progress toward its employment and price stability goals, that has been set as a conditions for contemplating doing so. 
  • This is despite the FOMC upgrading its economic assessment in the formal post-meeting Statement. This says that ‘indicators of economic activity and employment have strengthened (an  upgrade from ‘ have turned up’ in March) and that ‘sectors most adversely impacted by the pandemic have improved’ (versus ‘remained weak’ in March). 
  • The Statement also removed the adjective ‘considerable’ previously placed in front of the comment, repeated, that  ‘risks to the outlook remain’. The Fed chair also continued to stress the expected transitory nature of the pick-up in inflation that currently looks to be underway

FOMC – Powell will err on the side of removing accommodation too slowly rather than too quickly #AnirudhSethi

  
  Analysis
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The Federal Open Market Committee statement and Powell’s press conference on Wednesday US time were both non-eventful.

Responses are coming in, this a quick summary on what Oxford Economics have to say:
Powell signalled the FOMC would rather risk erring on the side of removing accommodation too slowly then removing it too rapidly, for several reasons:
  • heightened uncertainty around the pandemic remains
  • the economy and labour market are far from full recovery
  • new policy framework is asymmetrically dovish
  • policymakers want to avoid ‘taper tantrum’ that would send long-term rates higher

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Oxford Economics forecast is for a ‘gradual’ QE taper to being in 2022. but by the end of that year, the Fed’s open market account will remain very elevated.
The Federal Open Market Committee statement and Powell's press conference on Wednesday US time were both non-eventful.
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